The NSW Coalition government has ruled out relaxing tough new restrictions on coal seam gas drilling near homes and sensitive industries as the federal government urges it to expand the industry to avert a looming gas shortage.

State Energy Minister
Chris Hartcher
said there would be “no watering down or dilution" of any of the planned rules, including a proposed two-kilometre buffer zone between coal seam gas drilling and residential areas.

“That’s not negotiable," Mr Hartcher told The Australian Financial Review.

Mr Hartcher will convene an invitation-only energy summit in Sydney on Thursday. He is expected to reject calls to pay compensation to companies such as
AGL Energy
which will be hit by the new rules.

Federal Industry Minister
Ian Macfarlane
, a late addition to the summit’s line-up, has urged the state to reconsider the proposed residential buffer zone.

Mr Hartcher said “we expect the ­federal government to respect our own position that, while we are determined to increase the energy supply for NSW, we won’t be altering our protective framework". He said a legally-binding policy setting out coal seam gas exclusion areas around wineries, horse studs and ­residential buffer zones would be released “very soon".

AGL Energy
’s projects in Camden, south of Sydney, and the Hunter would be affected by the new rules. It declined to comment on Wednesday. Asked whether the government would pay compensation, Mr Hartcher said: “We aren’t considering that."

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NSW relies on other states for 95 per cent of its gas needs. Business Council of Australia president
Tony Shepherd
, who will address the summit, said: “We have a looming gas supply crisis in NSW and we must unlock our local CSG resources if we are to avoid shortfalls and the price hikes which come from shortages. Coal seam gas extraction has been working successfully in Australia for over 20 years. In the US it has been used for much longer."

A spokesman for
Santos
, whose coal seam gas plans in the Pilliga region of north-central NSW, is not affected by the rules, said on Wednesday the project “could in the first phase of development alone, supply in excess of 25 per cent of the natural gas used by NSW . . . by as early as 2017".

“Future expansion could double this amount. The effect of extended regulatory uncertainty on investor confidence in NSW should not be underestimated."

He said it was a sign to industry that NSW was “serious about obtaining supply". “The industry needs certainty. We respect that but we also want the industry to do two things: to engage with the community and to actually make the decisions for the investment."

Mr Hartcher said the government “would be keen to see NSW supplying anything from 50 to 60 per cent of its own gas". He was sceptical about a proposal by Northern Territory chief minister
Adam Giles
to link its natural gas pipeline system to Moomba in South Australia’s north, which could supply NSW. “We’re happy to discuss it with him. We would be surprised given the enormous capital investment that would be required," he said.

The federal Coalition has pointed to the burgeoning coal seam gas industry in Queensland as a model for NSW. It also imposes a two-kilometre buffer between projects and towns of more than 1000 people.

Mr Hartcher said the Queensland industry had the advantage of establishing itself earlier and projects generally were “a lot further away from major urban centres and from . . . prime agricultural land".

The purpose of the summit was to develop community consensus on the need for a NSW government-led “response to the energy challenge", Mr Hartcher said.

“We do have . . . energy security issues in NSW. It’s not confined to gas. It relates also to electricity and to renewable energy."

The Australian Petroleum Production & Exploration Association said NSW had $10 billion worth of gas to extract but there had been no activity because restrictions and uncertainty discouraged investors.

“If it is dealt with quickly and efficiently, there are 17 years of gas sitting in the state," chief operating officer
Rick Wilkinson
said.